Worries Over a W-Shaped Recovery

Nouriel Roubini has been "enjoying his moment as the Man Who Was Right, a
position no one occupies forever but which he is entitled to for now," read a recent Atlantic profile of the economics professor who accurately predicted the housing crash and resulting recession several years ago. That forecast and others has made Roubini's warning about a "double-dip recession" all the more worrisome.

Dial 'W' for Worry There's a growing danger that policymakers will push a growing economy into recession again, creating a W-shaped bust-boom-and-bust again scenario, Roubini wrote. If governments raise taxes, cut spending, and hike interest rates they will create recession and deflation. But if they maintain large deficits then inflation could take root and re-animate the recession, Roubini said. Finally, oil, energy, and food prices are "rising faster than the economic fundamentals warrant" and could go higher because of monetary liquidity. Roubini said the global economy will not withstand $100-barrel oil.

How It Works Roubini's worries that raising interest rates and/or higher commodities prices will knee-cap the recovery were echoed by several others. The Cato Institute's Richard Rahn said that higher interest rates and commodity prices will go up as the global economy recovers, which will push down real, after-tax disposable incomes, crimping consumption, and pushing the world back to recession. The New Republic's Noam Scheiber said higher interest rates and less government spending would be like what the U.S. government did in 1937 that caused a double-dip during the Great Depression. Yves Smith said some economists blamed rising commodities prices for getting us into recession in the first place.

Roubini's Wrong Douglas A. McIntyre said "Dr. Doom" is trying to stay relevant with his gloomy prediction, but there won't be a "W". Commodities prices won't sky rocket because demand is low due to high unemployment and sluggish industrial demand, McIntyre wrote. High prices can only last with strong demand, not excess liquidity, as Roubini worries. McIntyre ended by saying that Roubini is betting against the Federal Reserve's skills to be as "adroit in ending their intervention" as they were in creating it and saving the economy.

No Dip, Just A Slow Climb However, Roubini merely said there's a risk of a "W" happening, but believes a U-shaped recovery with slow growth will happen. Roubini told The Atlantic that banks will begin to lend again and the economy should start growing in 2011, but wrote in the Financial Times that growth from that point on will be slow. Roubini said slow growth will occur for a variety of reasons, some of which are rising unemployment, too-high debt levels, undercapitalized banks, and the side effects of government intervention.

The Economist said rising unemployment, a potential lurch in home sales, and the need for consumers to keep paying down debt will restrict economic growth in the U.S. "A gloomy U with a long, flat bottom of weak growth is the likeliest shape of the next few years."